Questions 1. If Symonds Electronics Inc. were to raise all of the required capital by issuing debt‚ what would the impact be on the firm’s shareholders? The impact on shareholders can be analyzed by calculating the EPS and ROE of the firm under the alternative scenarios as follows: All Debt With $5‚000‚000 Expansion Current Growth in Revenues Revenues EBIT Interest EBT EBT*(1-T) # of shares EPS Debt Equity Debt/Equity Ratio Return on Equity 15‚000‚000 2‚250‚000 0 2‚250‚000 1‚350‚000 1‚000‚000 1.35
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estimate cost of capital. JOANNA COHEN’S ESTIMATION OF COST OF CAPITAL: Joanna considers the following parameters to estimate the value by using WACC‚ which are‚ whether to use single or multiple cost of capital‚ capital structure‚ cost of debt and cost of equity. SINGLE OR MULTIPLE COST OF CAPITAL To use single cost of capital for estimation of WACC is a correct approach since most products have similar risk factor and they usually complement one another. We assumed Nike Inc. to have a single
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86% | 0.586% | Weight cost of capital | | | 5.971% | 3. Should the firm use this WACC for all projects? Explain and provide examples as appropriate. (10 pts) Yes‚ because WACC is by companies for performance evaluation and planning purposes. If the weights were changed then the company would have to make the required changes to yield the proper calculations. (Weighted Average Cost of Capital (WACC)‚ 2013) 4. Recompute the net present value of the project based on the cost of capital
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Marriott use the Weighted-Average-Cost-of Capital (WACC) method to measure the opportunity cost for investments. WACC = (1-t)rD(D/V) + rE(E/V) where D and E are the market values of the debt and equity respectively; rD is the pre-tax cost of debt; rE is the after-tax cost of equity; V is the firm value (V=E+D); and t is the corporate tax. This method is applied for Marriott as the whole corporation and for each of its three lines of business. WACC is calculated based on its financial data of 1987
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Torrington from Ingersoll-Rand. This reports provides the needed information on Torrington’s worth‚ price at which Torrington could be acquired and the acquisition strategies to negotiate its deal. The evaluation uses the discounted cash flow analysis using WACC to calculate the value of Torrington worth with synergies. The value turned out to be more than the estimated minimum value of the target. The final recommendation is to proceed with the acquisition as planed which would be beneficial to the Timken
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the expected return on debt is 6% with market value weight of 1/3. Therefore the firm’s pre-transaction WACC is 12% WACC (pre-transaction) = 2/3 * 15% + 1/3 * 6% = 10% + 2% = 12% a) (4 points) After the transaction GP will be all equity financed. The firm’s cost of equity the equals the WACC. As there are no taxes the firm’s WACC is independent of its capital structure and remains at 12%. WACC (post-transaction) = 12% = rE‚U * 1/1 => rE‚U = 12% b) (4 Points) In this case the debt-to-value ratio
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CASE 46 THE TIMKEN COMPANY Teaching Note Synopsis and Objectives The acquisition of Torrington from Ingersoll-Rand (IR) required a strategy that would meet both the investment and the financing objectives of the Timken Company. In that regard‚ the case provides an excellent example of the principle that investment and financing decisions can be considered independently. In effect‚ Timken captured the positive NPV of Torrington even though Timken was required to increase its leverage beyond
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1) How much importance should be given to the energy cost situation? Michael Burton’s proposal to expand into new energy efficient products is justified by increasing interest in the public and private sectors to reduce energy costs. At the highest level of government‚ the Obama administration has tied the US economy’s energy policy with its future success and competitiveness with other global powers. In a speech on June 2009‚ President Obama specifically mentions the Energy Department’s plans to
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TOKYO DISNEYLAND AND THE DISNEY SEA PARK: CORPORATE GOVERNANCE AND DIFFERENCES IN THE CAPITAL BUDGETING CONCEPTS AND METHODS BETWEEN AMERICAN AND JAPANESE COMPANIES. 1.What are the industry differences in US Corporate Governance and Japanese Corporate Governance? JAPANIES CORPORATE GOVERNANCE US CORPORATE GOVERNANCE Stakeholders of organiztions: Japanies system believs in the wealth maximization of stake holders‚ including managers‚ labour‚ suppliers‚ crediters etc American syatem always emphasized
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BUS 3303 Finance Course review Ale Previtero AGENDA 1. Overview of valuation cases 2. WACC • Cost of equity‚ choosing beta‚ choosing weights‚ when to use premium. 3. Valuation using Discounted Cash Flow (DCF) • Key assumptions‚ Terminal Value‚ sensitivity 4. Valuation using multiples • Key points‚ pros & cons‚ choosing comparable firms • Which multiple? Which year? Example. 5. Financing an Acquisition • Determine price. Financing. Making a decision. 6. Final exam
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